International Economic Week in Review: Good News From Canada, Australia and the EU
The Bank of Canada maintained their 1% interest rate policy this week. Their policy announcement contained the following overview of the Canadian economy:
Recent Canadian data are in line with October’s outlook, which was for growth to moderate while remaining above potential in the second half of 2017. Employment growth has been very strong and wages have shown some improvement, supporting robust consumer spending in the third quarter. Business investment continued to contribute to growth after a strong first half, and public infrastructure spending is becoming more evident in the data. Following exceptionally strong growth earlier in 2017, exports declined by more than was expected in the third quarter. However, the latest trade data support the MPR projection that export growth will resume as foreign demand strengthens. Housing has continued to moderate, as expected.
Inflation has been slightly higher than anticipated and will continue to be boosted in the short term by temporary factors, particularly gasoline prices. Measures of core inflation have edged up in recent months, reflecting the continued absorption of economic slack. Revisions to past quarterly national accounts have resulted in a higher level of GDP. However, this is unlikely to have significant implications for the output gap because the revisions also imply a higher level of potential output. Meanwhile, despite rising employment and participation rates, other indicators point to ongoing – albeit diminishing – slack in the labour market.
Canada experience a shallow recession several years ago, caused by oil’s price drop. That recession is now over. Unemployment has been dropping:
Inflation is contained:
And topline growth is growing strongly:
And this week, building permits rose again contributing to a rosier future outlook.
Australia also maintained their current rate posture this week. Their policy announcement observed that China continues to grow, thanks to strong fiscal stimulus. And while the Australian economy continues to expand, price pressures remain weak. On the former, the Australian Bureau of Statistics released their estimate of 3Q GDP, with a headline number of 2.8% year-to-date growth. This continues a trend of solid growth started in 2013:
Household spending and investment all rose. Best of all, engineering construction expanded for the 3rd time in four quarters, potentially indicating that the slowdown in this economic account had come to an end. On the negative side, although the savings rate slightly increased, it remains at low levels, indicating that weak wage growth has forced consumers to dip into their savings to maintain current consumption levels. In other Australian economic news, retail sales rose .5%, largely thanks to a big seasonal adjustment in the cafes and restaurants account, which was reported at +.1% but which was 1.7% SA. And building permits also rose, pointing to a higher future growth.
News from the EU continues to point to an expanding region. GDP rose .6% Q/Q and 2.3% Y/Y. Household consumption was up 1.9% while investment expanded a healthy 4.2% (no doubt aided by low interest rates which have stimulated loan demand). The four largest economies grew stongly: Spain + 3.1%, Germany +2.8%, France + 2.2% and Italy 1.7%. Retail sales, however, disappointed with a 1.1% monthly decline and .4% Y/Y rate of expansion. Three of the big four economies also saw a contraction. However, the trend for this series continues higher:
Finally, Yves Merch gave a speech titled Challenges for the Euro Area Monetary Policy in 2018 which contained two key observations. Despite cutting their purchases from 60 billion euros to 30 billion, the ECB will still have a strong impact on the market for two reasons: 1.) The ECB’s activity has shrunk the effective size of the market, allowing a smaller purchase amount to have a disproportionate impact and, 2.) the bank has a large monthly position of maturing debt.